TAXATION LAW. STUDENT ID:. [Pick the date]. Question 2.

TAXATION LAW
STUDENT ID:
[Pick the date]

Question 2
Based on the given information, the tax liability is to be computed for taxpayer Jack for the
two time periods i.e. tax year 2017-2018 and tax year 2018-2019.
Law
The assessable income would comprise of two components namely ordinary income (section
6-5 ITAA 1997) and statutory income (section 6-10 ITAA 1997). Ordinary income is defined
as income which is obtained from ordinary sources such as income from business,
employment, rent, interest & dividends. A key component of statutory income is capital
gains tax which is levied at the marginal tax rate (Barkoczy, 2017).
The computation of capital gains/(losses) is carried out only when a CGT event takes place.
One of the most common CGT events is A1 which takes place when a capital asset is sold as
indicated in ss. 104-10 ITAA 1997. The relevant formula for computation of capital
gains/(losses) has been highlighted in ss. 104-10(4) and involves subtraction of the asset cost
base from the sale price of asset (Austlii, 2019a). Another relevant aspect is market
substitution rule which is indicated in ss. 116-30 ITAA 1997 as per which for the purposes of
capital gain computation, market price would be used if the selling price varies from the same
especially in case of transactions which do not take place at arms length (Austlii, 2019b).
Further, in accordance with ss. 110-25 ITAA 1997, the cost base of asset includes acquisition
price, incidental costs (while buying and selling), ownership costs (land taxes, sewerage,
interest on borrowing), capital costs for improvement in asset value and maintenance of legal
title on asset (Austlii, 2019c).
Any capital losses would be used to offset the capital gains which may exist in the current tax
year or the capital losses are taken to the next year. Under no circumstances can these losses
be used to offset assessable income (Barkoczy, 2017). In order to reduce capital gains tax
liability, two methods are available namely indexation method and discount method (s. 115-
25 ITAA 1997). Indexation method relies on adjustment of cost base for inflation to lower
taxable capital gains. Discount method offers flat 50% discount on the net capital gains (after
adjustment of any capital losses) provided the asset has been held for atleast one year and
taxpayer is individual (Austlii, 2019d).
Application

Tax year 2017-2018
Source of ordinary income include employment related salary along with rent from property.
Thus, ordinary income for taxpayer Jack = $ 120,000 + $10,000 = $ 130,000
The CGT implications would be computed based on the respective capital gains/(losses)
realised from the sale of following assets.
Transaction 1: Sale of ABC Ltd
Purchase price of shares (also the cost base since no additional holding or incidental costs) =
$ 1,400
Market price is different from selling price, but for capital gains computation, market price
will be used especially because the sale is to a friend.
Market value at time of sale = $500
Thus, capital loss on ABC Ltd disposal = 1400 – 500 = $900
Transaction 2: Sale of Boat
It is a personal use asset since Jack does not have any business related with boat. Any capital
losses which are derived from sale of personal use assets would be ignored and not used for
any offsetting as indicated in ss. 118-10 ITAA 1997 (Austlii, 2019e).
Cost base of boat = $ 12,000
Sale proceeds of boat = $ 9,000
As sale proceeds<cost base, hence capital losses are realised which are ignored.
Transaction 3: Sale of Investment property
Investment property acquisition price = $ 250,000
Legal costs for investment property sale = $ 2,000 (incidental costs while selling)
Land taxes, sewerage cost and depreciation (termed as ownership related costs) = $50,000 +
$12,000 + $30,000 = $92,000
Cost base as per ss. 110-25 = $ 250,000 + $92,000 + $ 2,000 = $ 344,000